Faculty of Commerce, Law and Management (ETDs)

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    Anti-avoidance provisions limiting interest deductions: a comparative analysis between the OECD and South Africa
    (2021) Williams, Nebresca
    Companies have two options to finance their operations: equity injections from their shareholders or loans (SARS, 2013, p. 3). The cash outflows as a result of these two methods of financing are dividends and interest respectively (SARS, 2013, p. 3). Since dividends are not allowed as a tax deduction in South Africa, it is clear that companies would benefit by financing their businesses with debt rather than equity since the interest expense on a loan is deductible for tax purposes under s 24J of the Income Tax Act 58 of 1962 (the Act)(SARS, 2013, p. 3). A study completed by de Mooij, R. & Hebous, S. suggests that debt/asset ratios increase by at least 0.14% -0.46% for corporations every time there is a 1% increase in the tax rate, which proves company tax bias towards debt (Hebous & de Mooij, 2017). Using debt rather than equity also allows for the existing owners in a company to raise funding without the possibility of losing control of the company, which may be the case when equity instead of debt funding is utilised (Halka, et al., 2017, pp. 182-183).For multinational enterprises, it may be easier to raise debt funding from a company within the same group of companies versus debt obtained from external parties such as banks as they can take advantage of internal synergies (Reynolds & Wier, 2016, p. 4) this creates a problem for tax authorities in certain instances. The reason for concern is that some multinational enterprises choose to engage in excessive debt financing particularly from companies within their group to charge high interest rates to those branches situated in high tax jurisdictions (Palanský, 2019). Some groups issue loans from a company based in a low-tax jurisdiction allowing the borrower to deduct their interest costs in the high tax jurisdiction resulting in large interest deductions that lower not just the net tax bill for the group but also erodes the tax base in the high-tax jurisdiction (OECD, 2017a, p. 23). This research report will review how multinational enterprises use debt funding as an opportunity to avoid tax and what the regulations are in South Africa to protect the tax base in comparison with the recommendations from the Organisation for Economic Co-operation and Development. Section24J of the Act governs the fundamentals of interest deductibility. Section 31(2) of the Act limits interest deductions to the arm’s length amount of cross-border debt and interest. Section 23N of the Act limits interest deductions by a company on debt obtained to purchase assets or shares in reorganisation and acquisition transactions. Section 23M limits the deductibility of interest on debt from a foreign person that is not subject to tax in South Africa and is in a controlling relationship with the resident borrower
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    An analysis of the deductibility of interest expenditure rules in South Africa
    (2019) Pillay, Kerusha
    Taxpayers are broadly financed in two ways, namely through the use of debt and equity. The returns on capital and debt are treated differently from an income tax perspective (SARS 2013). The interest expense incurred by taxpayers in the production of income by a person carrying on a trade, are deductible in determining taxable income, subject to certain conditions and limitations. The number of provisions contained in the Income Tax Act of 1962 (the Act) which deal with the tax treatment of interest income and interest expenditure have gradually increased over time. There are numerous aspects to be borne in mind by resident and foreign companies when considering the income tax and withholding tax implications which may arise in respect of transactions giving rise to interest income and interest expenditure (SAICA 2015). This is affirmed by the number of provisions in the income tax act dealing with the deductibility of interest primarily dealt with in section 24J of the Act as well as indicated by the 2014 amendments to section 8F, the introduction of section 8FA, sections 23M and 23N into the legislation. The purpose of this report is to assess whether the Department of National Treasury (National Treasury) have taken the number of provisions of the deductibility of interest too far.